Three financial advisers at Cedar Brook in Pepper Pike fined, licenses suspended for "false" communications with clients about two high-risk investmentsPlain Dealer file

CLEVELAND, Ohio -- Two founders of Cedar Brook Financial Partners and its managing principal have had their securities licenses suspended after regulators found they made false statements about the safety of high-risk funds sold to clients of the Pepper Pike wealth management firm.

Under their agreements with FINRA, the three men accept and consent to their suspensions, as well as fines, without admitting or denying FINRA's findings.

FINRA said that Perlmuter, Slater and Nakhooda made "false and misleading statements" about the IMH Fund, a security backed by subprime mortgages, and Medical Capital Holdings Inc., an Anaheim, Calif.-based company that turned out to be a Ponzi scheme that had marketed $2.2 billion in notes to more than 20,000 investors nationwide. MedCap was sold by various advisors across the country. The medical-receivables company went under in 2009 when the Securities and Exchange Commission charged it with fraud.

FINRA also found that Perlmuter and Slater altered three customer accounts to reflect false net worth information. By inflating account balances on paper, the portion of those clients' portfolios in high-risk funds fell within Cedar Brook guidelines that such investments not exceed 20 percent of a person's holdings, according to FINRA's investigation.

Nakhooda said he agreed to the settlement so he could just move on. It was better, he said, "then spending years fighting with regulators." He said he didn't get bigger upfront commissions for recommending IMH and MedCap from Securities America -- Cedar Brook's broker-dealer -- than for recommending registered stocks.

Investment lawyers said MedCap promised broker-dealers interest rates ranging from 8.5 percent to 10.5 percent for selling MedCap notes, while commissions for trading public stocks tend to be much lower, ranging from 1 percent to 2 percent.

The sanctions against Cedar Brook financial advisors are a blow to one of the largest wealth management firms in Northeast Ohio, said attorney Thomas Wagner, whose clients are often people who have lost substantial money as the result of unsuitable investment advice.

"This was a tragedy for the investors, first and foremost, some of whom I represent," said Wagner, who teaches securities law at Cleveland-Marshall College of Law. "But it was also a tragedy for the Cedar Brook firm, which had a good reputation before this happened."

Perlmuter, 56, of Pepper Pike, received an eight-month suspension and $40,000 fine; Slater, 49, of Solon, a five-month suspension and $30,000 fine; and Nakhooda, 39, of Chagrin Falls, a nine-month suspension and $50,000 fine.

Wagner said 95 percent of registered representatives have no customer complaints on their public records. Multiple customer complaints on a financial advisor's record are what the industry calls a red flag, something that requires a heightened level of supervision, he said.

William Glubiak, who helped found Cedar Brook in 2005 and took over as CEO when Nakhooda was suspended, said the firm "takes responsibility for what we did.

"We did an insufficient job of explaining the downside risks of these products," he said. "We're not going to excuse the behavior."

The cases involving the Cedar Brook advisors are part of a nationwide investigation into MedCap and IMH that started years ago. Various broker-dealers, including Securities America, have been sued and faced sanctions in connection with the sour investments.

Securities America was the largest seller of Medical Capital, with its
brokers across the country selling about $700 million worth of the investment.

FINRA's reports cite specific instances in which it said the three Cedar Brook advisors sent emails to clients that contained "material misrepresentations" about the liquidity and safety of IMH and MedCap.

For example, a Slater email about IMH to a customer on Aug. 13, 2008, said "If you can project your needs at least 90 days in advance then yes, I'm comfortable with IMH. Otherwise, there isn't much selection with more liquidity and stability."

Nakhooda, from October 2007 through June 2008, sent emails to seven customers about IMH and MedCap with advice that they were liquid after 60 or 90 days and had yields of 10 percent, according to the agreement he signed.

"We're certainly sorry that any regulatory body would not view our emails as appropriate at the time," Nakhooda said. "But we're happy to reach a settlement and move on, with the full support of our clients."

Glubiak said Cedar Brook hired a new chief compliance officer last
August and has put controls in place "to make sure these things don't
happen again. My focus is to get this company back on track."

Glubiak expects Nakhooda and Slater to return to Cedar Brook, assuming the Ohio Department of Commerce allows them to reinstate their securities licenses after their suspensions.

"It's basically just a regulatory time out, for lack of a better term," Nakhooda said.

Perlmuter voluntarily terminated his securities registration two years ago. He declined comment on the FINRA settlement. Slater did not return calls to his office and home.

Cedar Brook dealt with another Ponzi in 2009 when about 50 of its clients got burned in the oil and gas fund Provident Royalties. Cedar Brook said at the time that its investors had about $9 million in Provident, representing what was then less than a half-percent of Cedar Brook's $2 billion in assets under management.

In connection with the more recent blowup of MedCap, investors in a federal court in California are trying to have their complaints against Wells Fargo, in its role as a trustee for MedCap notes, certified as a class action lawsuit. In February, the Bank of New York Mellon, another trustee for MedCap, agreed to pay $114 million to investors.

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